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Government Taxes Will Favor Video Portals

Here in the U.S., the taxation burdon on telecommunication services has always been excessive -- typical combined federal, state and local taxes and mandated fees reach 20 percent of the overall consumer cost of services. Likewise, service providers must pay their own duplicative business taxes.

The latest government revenue 'windfall' will be taxing video entertainment service delivery. New mandates will be good news for over-the-top video distribution models, such as the evolving video aggregator portals (Yahoo, Google, MSN, etc.), because they will still not be required to collect or pay these onerous taxes.

Acording to Kegan Research, of all the myriad legal actions over cable TV franchise fees and other costly mandates, potentially the biggest game changer is a U.S. federal appeals action now under way over a Kentucky regulation that extends taxes to satellite pay-TV.

A lower federal district court held earlier this year that Kentucky's 3 percent state excise tax and a 2.4 percent levy on gross revenue of all multichannel TV providers is legal. The state statute simultaneously relieves multichannel TV outfits of paying local municipalities any fees.

Because the state tax applies to all 'multichannel platforms', DIRECTV and DISH Network � which had escaped local franchising fees thanks to their satellite delivery � are now being taxed at the state level in Kentucky. Given that the litigation is in a federal court, the Kentucky decision has national implications as a precedent.

Kagan Research estimates satellite TV would pay about $1.1 billion if such statewide taxes were imposed in every state. At the same time, cable operators that fork over about $3.4 billion in local fees nationwide would save about $1 billion if all local fees were abolished and replaced by a Kentucky-style statewide levy.

DIRECTV and DISH parent EchoStar Communications argued unsuccessfully to the district court that statewide levies are inappropriate because satellite TV, unlike cable, doesn't use terrestrial public rights-of-way. The satcasters are fighting the decision in the U.S. Court of Appeals, Sixth Circuit. Satellite TV and Internet protocol TV (IPTV) being rolled out by telephone companies have sometimes escaped taxes on "cable TV," but the Kentucky statute applies to all types of TV such as "cable service, satellite broadcast and wireless cable service."

On local government levies, Kagan Research senior analyst John Mansell notes that often the biggest gripe is with mandates that cable TV operators pay a percentage of gross revenue to 'subsidize' Public, Educational and Government (PEG) access channels above the 5 percent of gross revenue federal cap on franchise fees. Sometimes such PEG fees result in cable operators paying an additional 3 percent of gross revenue to cities.

A frequent argument in attacking taxes and regulatory mandates is that they are unfair when applied to one type of multichannel platform, but leaving others exempt. Moreover, in the same way that government taxation has assured that telecom services are out of the reach of many lower-income American families, these latest public policies will result in pay-TV also being taxed like a consumer vice (i.e. alcohol and tobacco are taxed at similar excessive rates as telecom services).

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